Cost disease: Why everything is so damn expensive

The rent is too damn high.

But it's not just the rent. For the average person in America and other developed countries, costs are going up across the board. Energy bills are rising. Health care costs are exploding. College tuition is through the roof. Daycare for young kids eats up an entire paycheck. Taxes and fees increase every year, as if the government is determined to take what little remains.

Year after year, the prices we pay rise relentlessly. Millions of people feel like they're barely keeping their heads above water—or worse, that they're drowning in debt that steadily accumulates. It feels impossible to get ahead, no matter how we hustle or how hard we work.

But in this economic storm, there's an eye of calm. Almost every family, even the working poor, can afford a giant flat-screen TV. Homeless people can have smartphones and tablets with internet access. Amazon and other businesses can deliver ultra-cheap clothes, toys and other consumer goods to your door.

How is it possible that wants are now cheaper than needs? What kind of cruel paradox is this?

A cruel paradox

You're not just imagining this. It used to be that the basic stuff of life was cheap, and luxuries were expensive. This fits most people's intuitive sense of how the economy should work. It's also given rise to countless sarcastic thinkpieces about Baby Boomers who counsel younger generations to give up avocado toast and lattes.

But in recent decades, the economic world has turned upside down. The 20th-century economist William Baumol proposed a famous explanation for this.

Imagine the world before the Industrial Revolution. If you wanted to listen to music, you had to buy a ticket to hear a symphony. If you wanted new clothes, you had to pay a tailor or seamstress to sew them. If you wanted a new shovel, you had to pay a blacksmith to make it for you.

When everything was made by hand, there was fairly little difference in productivity, and therefore earning power, among these industries. One person could only produce one person-hour of work per hour, no matter what job they held.

But the march of technology has given rise to a divergence. Assembly lines, robotics, and other innovations have made some industries more efficient, meaning they can crank out more stuff faster for less money. With the rise of the internet, software companies can offer valuable products that aren't made of anything physical at all. As we consume more and more, outsize rewards flow to these industries—mostly the owners of capital, but the workers as well.

However, jobs that require a human touch haven't followed this trajectory of increasing productivity. A teacher in 2025 can't teach any faster than a teacher in 1825. (Obviously students can read textbooks or watch prerecorded lectures, but as most teachers would tell you, there's more to education than that.)

The same goes for artistic professions. Again, you can listen to prerecorded music whenever you want—but if you want to attend a live concert (or an opera, or a ballet, or a play), the performers can't play more often than musicians and performers from centuries ago. Their "productivity" hasn't risen at all in that sense.

What this means, in economic terms, is that wages for these human-essential jobs—arts, education, health care, social and governmental services—have to rise. The law of supply and demand dictates this, because otherwise, no one would do those jobs. They'd all flock to more productive industries, which can pay more because their costs of production are lower.

If you want to listen to a symphony, or have your kids taught by skilled teachers in small classes, or keep an emergency room or a fire station staffed 24/7, you have to pay for the privilege. Moreover, you have to pay the workers enough to make up the opportunity cost that they forego by taking that job rather than a different one. From a consumer perspective, we end up paying more and more for these services, even though we're not getting any more for our money than before.

This is cost disease. It's the empirical fact that if human-intensive jobs don't vanish, the wages paid for them have to rise over time to keep pace with higher-tech industries.

Cost disease also explains some other associated problems, like the spread of throwaway culture. When production is automated, making a new widget that's just like all the others is simple. Repairing a broken widget is more complicated, and requires human effort, skill and judgment. Hence, the trend toward cheap consumer goods made to be thrown away, rather than high-quality, durable goods that can be maintained and repaired.

Is there a cure for cost disease?

None of this means there aren't any ways to bring prices down. There are policy changes we can make that would help the middle class.

For example, it may well be true that college tuition is rising because of the mushrooming number of mid-level administrators, or overspending on glitzy sports facilities. We could eliminate this bloat and get back to simple, streamlined universities whose sole mission is to teach.

Health care costs can certainly be reduced. The government, if it wants to, can rein in abuses like private-equity firms that buy the patent rights for drugs just so they can jack up the price. Or we can perform more radical surgery by abolishing private insurance companies that bury doctors and patients beneath truckloads of paperwork. In the future, we may even have AI-powered surgeons that can perform complex medical procedures autonomously.

Rents are high because neighborhood NIMBYism bottlenecks dense new development that would add supply to the housing market. Giving developers more freedom to build would alleviate these shortages.

However, the theory of cost disease predicts that even if we tackle these problems, the underlying costs of human services will continue to rise.

In a way, this makes sense. In an advanced economy where more and more jobs can be automated, hiring humans to labor for you should be seen as (and is) a small-batch, premium product. Like hiring a woodworker to make a custom table for you rather than buying a mass-market one at the store, the inefficiency is part of the charm.

The thing is, cost disease shouldn't be this much of a burden. In the long run, automation makes us all richer. It frees us from backbreaking toil. We can produce more goods, at lower cost and with less effort, than was ever possible before. Even most poor people in the developed world today can have cars, computers, air travel and air conditioning. We're awash in consumer abundance that previous generations scarcely dreamed of.

We should be so much wealthier, compared to people of the past, that it shouldn't be a big deal to use some of our increasingly high incomes to occasionally hire humans for those jobs that still need doing.

If this isn't the case, it's because we've allowed inequality to soar out of control. Automation hasn't made us all wealthier in equal measure. Instead, the capital-owning class has captured a hugely disproportionate share of productivity gains.

The rest of us wind up fighting over the scraps that are left, so of course any rise in prices feels like a life-threatening crisis. That's the issue that we urgently need to solve. A fairer, more equitable distribution of wealth would make the sting of cost disease far less painful.